For petroleum operations, by virtue of Section 13 (1) (a) to (j) of PPTA, for the purpose of ascertaining the adjusted profit of a company in an accounting period, deductions shall not be allowed in respect of some disbursements or payments. Such include “any disbursements or expenses not being money wholly and exclusively laid out or expended, or any liability not being a liability wholly or exclusively incurred, for the purpose of those operations. Others also include any capital withdrawn or any sum employed or intended to be employed as capital and any capital employed in improvements as distinct from repairs, any recoverable insurance, rent of or cost of repairs to any premises or part of premises not incurred for the purposes of those operations; any income tax, profits tax or other similar tax whether charged within Nigeria or elsewhere; the depreciation of any premises, buildings, structures, works of a permanent nature, plant, machinery or fixtures etc.
The PPTA and the Capital Gains Tax Act did not include the word ‘‘reasonably’’ as a condition precedent to the allowance of an expense in the computation of the assessable income or as a deduction from the consideration accruing to a person on the disposal of an asset.
Depreciation is not allowed under any condition since capital allowances are granted in lieu of fixed assets expense. Depreciation should be checked to agree with what is charged to the Profit and Loss Account. Watch out for hidden depreciation.
Repairs and renewals
The cost of repairs are usually revenue and allowable for corporation tax.
The same rule applies to replacement of an item which is a subsidiary part of a larger asset, for example replacing a window.
In the situation where an improvement of the original item has taken place, for example a house with four windows has been upgraded to a six window house, this is not a revenue repair and should be treated as capital. In this example, the additional windows are likely to qualify for capital allowances, so tax relief is still available on the expenditure.
If an asset has been recently purchased and repairs are undertaken to restore the item to a usable condition, these ‘repairs’ will be treated as capital expenditure.
Staff entertaining is an allowable expense for company tax purposes, whereas client entertaining may be an allowable expense and a portion may be disallowed for company tax purposes.
Legal and professional fees
Legal fees are usually allowable, and this includes costs of chasing debts, defending trademarks, preparing legal agreements. Note, legal fees relating to capital items such as acquiring a new lease or buying a new property are not allowable. Legal and professional fees are not allowable if they have been incurred for a capital purpose or non-trading purpose, for example a company reorganisation or architect’s fees for building work.
Accountancy fee is fully tax deductible – unless it is for company set up or relates to your personal tax return. Fees incurred for preparing accounts for commercial reasons and for many other accountancy services are allowable provided they satisfy the ‘wholly and exclusively’ test. Other additional fees incurred for computing and agreeing the tax liability on trading profits are not allowable. There is, however, a longstanding practice of allowing normal recurring legal, accountancy, etc, expenses incurred in preparing accounts, or agreeing the tax liability.
Although business entertainment provided to clients may well be wholly and exclusively for business purposes, it is not allowable for tax purposes.